Community banks vs. big banks

Across the nation's banking landscape, the big are getting bigger and are offering more bank tools than ever.

These big banks have pioneered innovative banking features, including peer-to-peer banking and even ATMs with instructions in seven languages. New brokerage firms also let big banks offer wide-ranging financial services. Conversely, dwindling community banks have been hamstrung by sometimes shallow coffers, though the smaller banks still offer more consumer-friendly services and fewer fees.

The big banks are growing and are taking a larger share of the market, says James Kaplan, an attorney in Quarles & Brady's Chicago office. The combined assets of the 10 biggest banks are now a staggering $9.72 trillion, according to Bankrate estimates. These big guys have taken market share away from smaller banks.

Meanwhile, community banks have stuck to their deep local roots. Yet, they've also endured challenging times because of commercial loan weakness. In 2010, the number of community bank failures peaked at 157, according to the ValuEngine Quarterly FDIC (Federal Deposit Insurance Corp.) report. Fortunately, the failure rate is slowing. Only 92 community banks failed in 2011 and 51 in 2012. Through June of last year, failures had slowed even further to only 13.

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"Community banks are mostly coming out of the woods," says Richard Suttmeier, chief market strategist at ValuEngine.com. "They do still have some problem real estate loans, though, that go back to the financial crisis."

Given this changing banking landscape, it pays to weigh pros and cons of big banks versus community banks.

Big banks

Pros

Plenty of ATMs and branches. The big megabanks like JPMorgan Chase & Co. and Wells Fargo have tens of thousands of ATMs and thousands of branches, so they're highly convenient. For example, Citibank, the nation's third largest bank, has more than 1,000 branches in the U.S. and 30,000 ATMs, including 6,000 in 7-Eleven convenience stores.

Globally, Citibank has ATMs in more than 40 countries. Bank of America, through its Global ATM Alliance, lets you use fee-free ATMs throughout Europe, the Caribbean and other countries. Such global reach makes big banks good options for travelers and business people who want global ATM access, says Mark Fellhauer, a St. Louis-based consultant with Arch City Capital.

A deep menu of financial services. Following the financial crisis, many banks such as Bank of America and Wells Fargo also began to own brokerage services with loads of investor features. That's good news for high-net-worth individuals who also can access trust officers and estate planners along with brokers to buy and sell stocks and bonds.

"Big banks are good for affluent people who want all their assets in one place," Fellhauer says. Also, accounts can be bundled together at one firm and viewed on one account webpage.

Smaller banks don't have the resources to offer this innovative technology, which may frustrate early adopters, Fellhauer says.

These high-tech tools, along with large ATM networks, are stopping consumers from switching their accounts in large numbers, according to a report by Javelin Strategy & Research, a banking research firm. The reason is that the big banks are very convenient to use, the Javelin report says.

Cons

Higher fees than smaller banks. Big banks typically charge higher fees for their services. For example, free checking is only available at one-quarter of big banks, according to a 2012 survey by the nonprofit U.S. PIRG.

For example, Chase now charges a $12 monthly service fee for its standard checking accounts; it was previously fee-free.

Harder to navigate. Big banks have many reporting levels and higher staff turnover, Arch City Capital's Fellhauer says. These conditions can make it harder to get fees waived or good loan rates negotiated.

Community banks

Pros

Trademark personal service. Community banks may know your whole family, since they're more relationship-based, Fellhauer says. Also, branches are smaller and more intimate. When you visit a community bank, you're apt to get a toaster for opening an account, grab some popcorn or get a cup of coffee. This personalized service helps small banks chalk up high personal satisfaction scores, according to the American Consumer Satisfaction Index on banking in the third quarter of 2013.

More fee-free checking. Community banks also offer lower fees than big banks. Some 63 percent of small banks offer free checking, according to a survey by U.S. PIRG released in November 2012. They also have lower overdraft fees and balance requirements for avoiding checking fees. Some small banks are even reimbursing several, if not all, surcharges at out-of-network ATMs, U.S. PIRG says.

More lending flexibility. Community banks can offer more commercial loans than big banks, Fellhauer says. And rates on car loans may be cheaper, too. As of 2011, they held 14 percent of banking industry assets, but held 46 percent of the industry's small loans to farms and businesses, according to the FDIC report issued in December 2012.

Cons

Small banks still struggling. Despite their strengthening balance sheets, some community banks are still working to stay afloat. There were 612 problem community banks in the first quarter of 2013, according to ValuEngine. Complying with new banking regulations, such as the Dodd-Frank financial reform law, could weaken community banks further since their profit margins are razor thin, Quarles & Brady's Kaplan says.

ValuEngine's Suttmeier says the upshot is that consumers should make sure their community bank is insured and that they don't exceed the $250,000 FDIC insurance limit on bank accounts.

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